Stamp Tax Verba 28.1 TGIS: Vertical Property Exemption and Compensatory Interest (CAAD 397/2016-T)

ARBITRAL DECISION

1. Report

A - General

1.1. A…, S.A., a public limited company with registered office at…, …, …-… Lisbon, registered at the Commercial Registration Office (Conservatória do Registo Comercial) of Lisbon under the single registration and collective person number … (hereinafter referred to as "Claimant"), presented, on 14.07.2016, a request for the constitution of a single arbitral tribunal in tax matters, which was accepted, seeking, on the one hand, the declaration of illegality of tax acts relating to the assessment of Stamp Tax (Imposto do Selo) for the year 2015, concerning item 28.1 of the General Table of Stamp Tax (hereinafter "GTST"), relating to properties of which it is the owner, as will be better seen below and, on the other hand, the recognition of the right to compensatory interest for the payment of undue tax payments.

1.2. In accordance with the provisions of article 6(2)(a) and article 11(1)(b) of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council of the Administrative Arbitration Center (CAAD) designated the undersigned as arbitrator, and the parties, after being duly notified, did not manifest opposition to such designation.

1.3. By order of 24.08.2016, the Tax and Customs Administration (hereinafter referred to as "Respondent") proceeded to the designation of Mrs. B… and Mrs. C… to intervene in the present arbitral proceedings, in the name and representation of the Respondent.

1.4. In accordance with the provisions of article 11(1)(c) of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the arbitral tribunal was constituted on 04.10.2016.

1.5. On the same date, 04.10.2016, the highest official of the Respondent's service was notified to submit to the Arbitral Tribunal a copy of the administrative file that might exist and, if desired, within a period of 30 days, to present a reply and request the production of additional evidence.

1.6. On 31.10.2016 the Respondent submitted its reply.

B – Position of the Claimant

1.7. The Claimant is the owner of urban properties in the regime of vertical ownership referred to in 1.7, as evidenced by the property records attached to the request for arbitral pronouncement as documents 1 to 3, whose contents are hereby reproduced and located in Lisbon: i) Avenue …, … to …; ii) Street …, No. … to …; and Street …, … to ... (hereinafter, the "Properties").

1.8. Each of the Properties has several floors and divisions capable of independent use, not all destined for residential purposes.

1.9. None of the floors and divisions capable of independent use destined for residential purposes in any of the Properties has a tax asset value (hereinafter "TAV") equal to or greater than €1,000,000.00 (one million euros).

1.10. The Claimant was notified of the assessments of Stamp Tax (hereinafter referred to as "ST") which are referred to in the documents attached to the request for arbitral pronouncement with numbers 4 to 53, whose contents are hereby reproduced, relating to each of the Properties, which were based on article 1 of the Stamp Tax Code (hereinafter the "STC"), in item 28.1 of the GTST, whose final payment dates relate to the end of April 2016, concerning the first installment of the ST levied on the floors and divisions capable of independent use destined for residential purposes.

1.11. The Claimant proceeded to payment of the first installment of the tax which was required of it by the assessments referred to above, and therefore also requests recognition of its right to receive compensatory interest.

1.12. The Claimant contends that it was necessary to treat the floors or fractions capable of independent use separately for purposes of ST assessment, and that the law does not establish that the TAV of a property composed of several independent fractions corresponds to the sum of the TAV of the floors or divisions capable of independent use.

C – Position of the Respondent

1.13. The Respondent expresses the understanding that the interpretation which the Claimant makes of item 28.1 of the GTST does not correspond to its literal wording, and that the disputed assessments result from the direct application of the legal rule in question, based on objective elements, without any subjective or discretionary assessment.

1.14. The Respondent argues that in properties in a regime of full ownership there are no autonomous fractions to which tax law can attribute the qualification of property.

1.15. The subjection to ST of item 28.1 of the GTST results only from the combination of two facts: the residential purpose and the tax asset value of the urban property registered in the matrix being equal to or greater than €1,000,000.00 (one million euros), which is verified with respect to each of the Properties.

1.16. Horizontal ownership and vertical ownership are differentiated legal institutions to which different civil law regimes correspond; tax law respects this same difference.

D – Clarification and Conclusion of the Report

1.17. By order of 09.01.2017, the arbitral tribunal dispensed with the meeting provided for in article 18 of the Legal Regime for Tax Arbitration (hereinafter "LRTA"), since the parties had already brought to the proceedings the necessary and sufficient factual elements for the issuance of the decision, which was expected to take place by 27.02.2017.

1.18. The arbitral tribunal is materially competent, in accordance with the provisions of articles 2(1)(a) of the LRTA.

1.19. The parties possess legal personality and legal capacity and have legitimacy in accordance with article 4 and article 10(2) of the LRTA, and article 1 of Ordinance No. 112-A/2011, of 22 March.

1.20. The cumulation of claims made in the present request for arbitral pronouncement, in honor of the principle of procedural economy, is justified since the contested assessment acts are based on the same factual basis and appeal to the application of the same legal rules, and the compensation claim formulated is also acceptable in theory, since article 3 of the LRTA, by expressly admitting the possibility of "cumulation of claims even if relating to different acts", accommodates, without hermeneutical abuse, the consideration of a claim that arises, in necessary terms, from the judgment which the arbitral tribunal sustains regarding the validity of the assessments in question.

1.21. The proceedings do not suffer from any nullity and no exceptions have been raised by the Parties that prevent the consideration of the merits of the case, and therefore the conditions are met for the issuance of the arbitral decision.

2. Factual Matters

2.1. Established Facts

The following facts are deemed established:

2.1.1. The Claimant is the owner of urban properties in the regime of vertical ownership referred to in 1.7 (docs. nos. 1 to 3, attached with the request for arbitral pronouncement).

2.1.2. Each of the Properties has a total TAV exceeding €1,000,000.00 (one million euros) – (docs. nos. 1 to 3, attached with the request for arbitral pronouncement);

2.1.3. None of the floors or divisions capable of independent use destined for residential purposes has a TAV equal to or greater than €1,000,000.00 (one million euros) (docs. nos. 1 to 3, attached with the request for arbitral pronouncement);

2.1.4. The Respondent, for purposes of applying item 28.1 of the GTST to each of the Properties, proceeded to the arithmetic sum of the tax asset values of each of the floors or divisions with residential purpose, thus excepting the floors or divisions without such residential purpose, and establishing, with respect to each of the Properties, a "Tax Asset Value of Property – total subject to tax exceeding €1,000,000.00 (one million euros) – (docs. nos. 4 to 53, attached with the request for arbitral pronouncement);

2.1.5. The Claimant was notified of the ST assessments referred to in docs. nos. 4 to 53 attached to the proceedings with the request for arbitral pronouncement, relating to the first installment of the tax which was required of it (docs. nos. 4 to 53, attached with the request for arbitral pronouncement);

2.1.6. On 22.04.2016, the Claimant proceeded to payment of €47,834.40 (forty-seven thousand eight hundred and thirty-four euros and forty cents) respecting the first installment of the tax which was required of it, and whose payment deadline ended at the end of April 2016 (docs. nos. 4 to 54, attached with the request for arbitral pronouncement);

2.2. Unestablished Facts

There are no facts relevant to the consideration of the merits of the case that have been deemed unestablished.

2.3. Justification for the Establishment of Factual Matters

The facts were deemed established based on the documents submitted to the proceedings by the Parties and on the positions assumed by them in the written pleadings presented.

3. Legal Matters

3.1. Questions to be Decided

It follows from what has been stated above that the questions to be considered are, fundamentally, two:

a) Whether a property constituted in full ownership or vertical ownership, but with floors or divisions with independent uses, is a "residential property" for purposes of the application of article 1 of the STC and item 28.1 of the GTST, as amended by article 4 of Law No. 55-A/2012, of 29 October, as amended by Law No. 83-C/2013, of 31 December; and

b) To clarify whether, if the claim for declaration of illegality is deemed well-founded and the contested assessments are consequently annulled, the Claimant, within the scope of the present arbitral proceedings, may obtain the condemnation of the Respondent to pay compensatory interest regarding the amounts it delivered for satisfaction of the tax illegally required by the latter.

3.2. Item 28.1 of the GTST

Law No. 55-A/2012, of 29 October, among several amendments it made to the STC, added, by its article 4, item 28 to the GTST, which, after the amendment introduced by Law No. 83-C/2013, of 31 December, currently has the following wording:

"28 - Ownership, usufruct or right of superficies of urban properties whose tax asset value contained in the matrix, in accordance with the Municipal Property Tax Code (MPTC), is equal to or greater than (euro) 1 000 000 - on the tax asset value used for purposes of Municipal Property Tax:

28.1 - Per residential property or per land for construction whose construction, authorized or planned, is for residential purposes, in accordance with the provisions of the Municipal Property Tax Code - 1%;

28.2 - Per property, when the taxpayers who are not natural persons are resident in a country, territory or region subject to a clearly more favorable tax regime, listed in the list approved by ordinance of the Minister of Finance- 7.5 %."

As can be seen, item 28.1 today refers to "residential property" and, before the amendment introduced by Law No. 83-C/2013, of 31 December, referred to "property with residential purpose".

Now, neither of these concepts is defined in any provision of the STC, and it is therefore important to interpret the said item of the GTST in light of what is provided in the Municipal Property Tax Code, a diploma to which article 67(2) of the STC expressly refers when matters not regulated in the STC are in question concerning item 28.

Article 6(1) of the STC divides urban properties into: i) residential; ii) commercial, industrial or for services; iii) land for construction and, finally, iv) others. Article 6(2) clarifies that residential are buildings or constructions licensed for such purpose or, in the absence of a license, which have such purpose as their destination.

It is therefore important to assess whether a building in vertical ownership regime can be considered a "residential property" for purposes of the provision in item 28.1 of the GTST.

3.3. "Vertical Ownership" and the Application of Item 28.1 of the GTST

Without prejudice to the interest, not merely dogmatic, of establishing the meaning and scope of the concept of "residential property", it is necessary to respond to the question of whether, for purposes of the application of item 28.1 of the GTST, the TAVs of each of the floors or divisions with independent use of a given building can be added together and deemed to be destined for residential purposes, as the Respondent did with respect to the Properties (excepting the parts destined for a different purpose, other than residential).

a) The property register of properties in full ownership or vertical ownership and the collection of Municipal Property Tax

It is important to clarify from the outset that "each floor or part of a property capable of independent use is considered separately in the property registration, which also discriminates its respective tax asset value", as can be read in article 12(3) of the Municipal Property Tax Code. Also the Municipal Property Tax, in properties subject to the regime of full ownership, gives typical relevance to each floor or part of a property capable of independent use (article 119(1) of the Municipal Property Tax Code).

In other words, it is clear that the legislator, in the Municipal Property Tax Code, did not intend to adhere to the rigor of the legal form of real rights affecting properties, but rather to the use given to them, namely in cases where a property, legally speaking, is composed of different floors or parts capable of independent use.

It could be said, not unreasonably, that the legislator, for purposes of taxation under Municipal Property Tax, chose to confer autonomy, independence, on each of the parts or on each of the floors of a single property, provided that they and the others show independent use, to the point of foreseeing the individualized registration in the matrix of each of these independent parts and of imposing on the taxation under Municipal Property Tax an equally autonomous collection. Despite the legal existence of a single property, it is the legislator itself who not only recommends but imposes the autonomous consideration of each of the independent parts, for purposes of taxation of property.

b) The Application of Item 28.1 of the GTST to Each of the Independent Parts

If this is so for Municipal Property Tax, as was attempted to be demonstrated, it cannot fail to be so also for Stamp Tax, namely for purposes of the application of item 28.1 of the GTST.

Moreover, this problem, if the tax, Municipal Property Tax or Stamp Tax, were purely proportional, would not exist or would be harmless, since the sum of the parts would necessarily correspond to the whole. However, that is not the case in the present proceedings.

As was seen, the Stamp Tax to which item 28.1 of the GTST appeals is only due with respect to residential properties and, in these, only to those that have a TAV equal to or greater than €1,000,000.00 (one million euros).

No reason is seen here for the functional, instrumental disregard of the autonomy of each of the parts capable of independent use of a property, nor can it be concluded that, for purposes of the application of item 28.1 of the GTST, a unity is imposed that, being undisputed in terms of real rights, is not so in the context of taxation on real estate property.

We believe that this finding results from the necessary interpretive effort of item 28.1 of the GTST. Article 11(1) of the General Tax Law mandates that in determining the meaning of tax rules and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

Now, article 9(1) of the Civil Code expressly states that interpretation should not be limited to the letter of the law. The interpreter, starting from the source, must seek to grasp the norm, that is, the manifestation of an intended duty to be. It can already be seen that the literal expression is relevant, however, the interpreter may well feel the need to gather other hermeneutical elements to identify the norm. For this reason, the legislator opens the door to the possibility of reconstructing from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied. This legal opening does not authorize an interpretation that does not have a minimum of verbal correspondence in the letter of the law but seeks, of course, to free the interpreter-applier from a reading manifestly misaligned and, for this reason, unjust, even because, as article 9(3) of the Civil Code clarifies, the "interpreter shall presume that the legislator established the most correct solutions".

In our view, considering the spirit of the law (which we believe is not contradicted by its letter) it is not apparent that it is the legislator's intention to apply item 28.1 of the GTST to each of the parts of a property when only from the sum of all of them results a TAV equal to or greater than the legal threshold.

We know that the regime of properties in horizontal ownership is not the same as those in vertical ownership. However, what is at issue is not to ascertain this difference, which is evident in terms of real rights. What matters here, it seems to us, is to determine whether on this difference a different tax treatment can be based, that is, to ascertain whether this dissimilarity should be attributed a tax disparity that corresponds to a defensible and acceptable interest. If we do not perceive an admissible criterion that allows us to identify the reason for the difference in tax treatment between properties in horizontal ownership and properties in vertical ownership, we can only explain it on the basis of the arbitrariness of the legislator, which, in light of the rules by which normative interpretation should be governed, seems to us to be rejected outright.

c) The Rationale (Ratio Legis) of Item 28.1 of the GTST

What was said above does not ignore the confessed purpose of the proposer of the legislative amendment already referred to. The interpretation which is here adopted is in harmony with what appears to have been the unequivocal original intention of the Government, author of the proposal that resulted in this legislative intervention. Nor does it appear that the wording given to it by Law No. 83-C/2013, of 31 December sought to contradict this understanding.

When presenting and discussing, in Parliament, draft law No. 96/XII (2nd), the Secretary of State for Tax Affairs expressly stated[1]:

"The Government proposes the creation of a special tax on high-value residential urban properties. This is the first time that in Portugal a special taxation has been created on high-value properties intended for residential purposes. This tax will be 0.5% to 0.8% in 2012 and 1% in 2013, and will apply to houses valued at €1 million or more."

Now, the Secretary of State for Tax Affairs presented this draft law by referring, unequivocally, to the expression "houses valued at €1 million or more", note well.

Thus, despite the deficiency of the legislative technique adopted, it follows with meridian clarity that item 28.1 of the GTST, even after the amendment introduced by Law No. 83-C/2013, of 31 December, cannot be interpreted in the sense that it encompasses each of the floors, divisions or parts capable of independent use when only from their respective sum results a TAV equal to or greater than that provided for in the same item. In fact, none of the "houses" of the Properties to which we have been referring present, by themselves, a value equal to or greater than 1 million euros.

d) Conclusion

For the reasons stated, it is the finding of the arbitral tribunal that the assessment of Stamp Tax based on item 28.1 of the GTST is tainted with illegality with respect to each of the floors or parts capable of independent use of the Properties, since item 28.1 cannot be interpreted in the sense that it can be applied to floors or parts capable of independent use of a property in full or vertical ownership, when only from the sum of each of these floors or parts can a TAV equal to or greater than €1,000,000.00 (one million euros) be obtained, not exceeding the TAV of each of the said floors or parts that legal threshold.

3.4. Compensatory Interest

Article 24(1)(b) of the LRTA provides that "the arbitral decision on the merits of the claim against which no appeal or challenge shall lie binds the tax administration from the end of the period provided for appeal or challenge, and the latter must, in the exact terms of the well-foundedness of the arbitral decision in favor of the taxpayer and until the end of the period provided for voluntary execution of judgments of tax courts, restore the situation that would have existed if the tax act subject to the arbitral decision had not been taken, adopting the acts and operations necessary for that purpose".

It is not ignored that the legislative authorization granted to the Government by article 124 of Law No. 3-B/2010, of 28 April, on the basis of which the LRTA was approved, determines that the tax arbitral process constitutes an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters. Although articles 2(1)(a) and (b) of the LRTA ground the competence of arbitral tribunals in "declarations of illegality", it seems reasonable to understand that it comprises the powers which in judicial challenge proceedings are attributed to tax courts, and it is certain that in judicial challenge proceedings, in addition to the annulment of tax acts, claims for compensation can be considered, particularly those relating to compensatory interest.

Indeed, the principle of cognoscibility of compensation claims, in administrative appeal or in judicial proceedings, is justified whenever the damage which is sought to be remedied results from a fact attributable to the Tax and Customs Administration. We find manifestations of this principle in article 43(1) of the General Tax Law and in article 61 of the Code of Tax Procedure and Process.

Thus, having the Claimant paid, in whole or in part, the tax which the disputed assessments required of it, it has the right to compensatory interest counted from the date of payment until its full reimbursement.

4. Decision

In accordance with the grounds set forth above, the arbitral tribunal decides:

a) To uphold the claim for arbitral pronouncement with the consequent annulment of the disputed assessments, with all legal consequences, in particular the reimbursement to the Claimant of all amounts paid by it with respect to the assessments hereby annulled;

b) To uphold the claim for the condemnation of the Respondent to pay compensatory interest, at the legal rate, to be counted from the date of the respective payment until its full reimbursement.

5. Value of the Proceedings

In accordance with the provisions of article 306(2) of the Code of Civil Procedure, article 97-A of the Code of Tax Procedure and Process and also article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at €47,834.40 (forty-seven thousand eight hundred and thirty-four euros and forty cents).

6. Costs

For the purposes of the provisions of article 12(2) and article 22(4) of the LRTA and article 4(4) of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is set at €2,142.00 (two thousand one hundred and forty-two euros), in accordance with Table I annexed to said Regulation, to be borne entirely by the Respondent.

Lisbon, 20 February 2017

The Arbitrator

_______________________________
(Nuno Pombo)

Text prepared by computer, in accordance with article 131(5) of the Code of Civil Procedure, applicable by virtue of article 29(1)(e) of the LRTA, in accordance with the orthography prior to the Orthographic Agreement of 1990.

[1] See Official Journal I Series No. 9/XII -2, of 11 October, p. 32.